I am a professor of economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Research Associate of the National Bureau of Economic Research, a contributor to Bloomberg, the FT, the Economist, Forbes, and other media and President of Economic Security Planning, Inc. -- a company that markets personal financial planning tools at maximizemysocialsecurity.com and economicsecurityplanning.com. Recent books: Get What's Yours -- The Secrets to Maxing Out Your Social Security Benefits, The Economic Consequences of the Vickers Commission, The Clash of Generations (with Scott Burns), Jimmy Stewart Is Dead, and Spend 'Til the End. Follow me on twitter @kotlikoff Circle me on Google+

Another Victory in the War on Our Children

The “grand” bargain forged by Congress and the Administration to keep us from falling off the so-called fiscal cliff — a conveniently manufactured crisis if ever there was one – represents the latest victory in the war on our children.

Although the budget fight has been posed as one between the rich and the poor, this has been a sideshow to divert attention from the real fight – the one between the old and the young. In this fight, both Republicans and Democrats are on the same side, joining forces, as they have for decades, to gang up on our kids.

According to the Congressional Budget Office’s most recent long-term projection, there is a $222 trillion present value gap separating all projected future expenditures and all projected future taxes. Eliminating this gap requires cutting spending or raising taxes to the tune of 12 percent of GDP this year and every year in the future.

In terms of greenbacks, that’s $2 trillion this year, $2 trillion times 1.05 (the sum of the inflation rate plus growth rate) next year, $2 trillions times 1.05 squared in 2015, etc.

Over the next decade, these adjustments, which are essential to remove the fiscal sword of Damocles suspending over our children’s slender necks, total $25 trillion. Yet the tax changes just enacted raise only $600 billion over this period!

Furthermore, Congress and the Administration will likely take steps to permanently reduce the automatic spending cuts that are now scheduled to kick in. Indeed, the midnight fiscal “rescue” includes a two-month postponement of these cuts. If that happens, the 10-year savings will be even smaller.

The intergenerational blinders with which Washington is choosing to operate are as thick as they get. The fiscal gap – the standard measure economists use to analyze fiscal sustainability and intergenerational equity – is just one of many inconvenient truths Washington is ignoring.

Here are some more.

Generational policy is a zero-sum game. Waiting to get our fiscal house in order lets more current generations off the hook and puts our kids further on the hook.

The $222 trillion fiscal gap grew by $11 trillion over the last year, an amount that equals the size of all the official debt in the hands of the public.

Washington’s artful “accounting” has put only $11 trillion of our nation’s fiscal gap on the books and kept $211 trillion, represented primarily by entitlement obligations, off the books. Yes, entitlement commitments aren’t legal obligations, but try telling that to an 80-year old collecting “her” benefits.

When the 78 million baby boomers are fully retired they will collect, on average, $40,000 measured in today’s dollars, in Social Security, Medicare, and Medicaid benefits. This bill will total over $3 trillion per year.

Expenditures on Social Security, Medicare, and Medicaid, measured as a share of GDP, grew 20 percent over the past four years. And the baby boomers are just starting to retire.

Entitlement spending is not the only problem. We are spending more on our military than the next 10 countries combined and still hear calls for more.

Our six-decade long policy of take as you go – letting each older generation take from the young while promising the young their own turn, when old, to expropriate their children – has financed a fantastic spending spree by oldsters? This spending has driven our national saving rate from 14 percent in the fifties to 1 percent now.

Countries that don’t save, don’t invest. Our country is now investing a paltry 5 percent of its national income (down from 14 percent in the fifties), with 4 of those 5 percentage points representing investment not by Americans, but foreigners?

Our sustained low rate of domestic investment has had its own generational impact. Real weekly take-home pay per worker hasn’t risen for decades?

Countries that get overcommitted resort to printing money. And the Federal Reserve has been printing money at mind-boggling rates to pay Uncle Sam’s bills. Twelve cents of every dollar spent these days is simply printed, either physically or electronically. The monetary base, which measures all the money the government has ever printed, has grown $2 trillion — by a factor of 3.5 — since 2007. This has set the stage for a more than tripling of the price level.

Maybe no one in Washington knows these things. Or maybe the war on our children is being waged on purpose? Maybe America’s oldsters, who do a lot of the voting, don’t care about America’s youngsters for a reason. Maybe they don’t see them as their children. Maybe they see them as someone else’s children and ripe for the picking.

Whatever the reason for our immoral generational policy, there is one thing everyone should know. We are on a course of fiscal and economic ruin, which will destroy not only our children’s futures, but ours as well.

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My comment may not be palatable to regular Forbes readers. But there are ways to reduce the deficit, on both sides, revenue & spending:

If fed. ind. income tax goes up to 50% on incomes of $5 to $25 million, and another rate of 70% on >$25 million, those very high earners could afford such high taxes, without significantly affecting their life-style. The $ figures rise with inflation.

A slowly rising federal gas tax & still more slowly rising Wall Street Transaction tax, starting at 0.01%, going up to at the most 1%, on all transactions.

On the spending side, the largest driver is skyrocketing healthcare cost. If a single-payer universal healthcare system were to be introduced, and all healthcare workers are government employees, so much administrative cost could be reduced, while providing free universal healthcare, which would be a dream come true for most.

Patent protection for drugs should end. Let the drug-makers submit their R&D budgets; taxpayers foot the entire bill. This way more orphan drugs would be developed. Drug prices would plummet, saving everyone huge sums.

There have been so many drastic changes in all sectors of the economy. These changes in healthcare sector could also be digested by people employed by insurance and other companies.